If you want an investor or bank to give you money for your business, the important thing to know is that the majority of funders is looking for a way to make money without taking too much risk. They are looking for what is called a “safe bet”. (One of the main places you will see this is banks.)
In Europe, there is a saying that you can only get money from a funder when your business can prove that it does not actually need the money! What does this mean? It means that funders want to see:
a strong business that is doing well financially
a solid strategy and plan to keep the business doing well
enough cash flow to convince them that they will get their money back
clear governance and checks & balances
Of course, there are other things that funders will also look at. Whether the country and the economy are stable, whether they will be able to get their money out of the business (or the country), whether the legal system is strong and will be fair to them. In other words, things that will tell them how high the risk is that if they give you money, they will lose it. In future posts, I will discuss these issues. But today, I want to focus on one thing: there is no free money!
Understanding the mindset of the investor
If you want somebody to take their money and put it into your business, you are asking that person for a favour. Why should the investor take money that they have worked hard to get and put it in a stranger’s business? They will not do so unless they are convinced that the reward or benefit of doing so will be higher than the risk. Secondly, if they are putting their money into your business, they cannot use that same money to do other things. So the reward or benefit will also have to be enough to compensate them for the fact that this money cannot be accessed to do other things.
One of the main things that a funder will look for when deciding whether or not to invest, is your business plan. They want to know if you have a good team, if your operations are under control, if you have a good marketing strategy, and – very, very important – how the business is doing financially. This means that you yourself have to fully understand and be in control of your business operations in order to be able to write a good plan and answer any of their questions.
To determine how well the business is doing financially, funder will look at your cash flow. If you are just starting your business, you may not yet have a cash flow. In that case, the funder will look at your cashflow forecast. This is based on how much you are expecting to sell, AKA your sales forecast.
And this is where I see a whole lot of business owners struggling. Their sales forecast is not realistic, and so their Profit & Loss estimate is also not realistic. Meaning: all the financial information is not realistic. Result: the funder rejects your application.
What not to do
I have so many examples of business owners who have contacted me and told me, “I need you to help me find a funder to give me one million USD!” But when I start asking questions, I find out that either they have not yet sold anything because the business has not yet started, or the business has never gone beyond 50 000 USD in sales and there is no clear strategy for how to grow the business. Tell me, how much of your own money will you give to a stranger who does not have a clear idea about where they are going and how they will repay you?
The business plan
The business plan is your point of departure for any funding application. There are several different models you can use for this, for example the traditional business plan or the Business Model Canvas. Whichever one you use is left with you. The important thing is that the business plan you are presenting to the funder should cover all the issues that he or she considers to be important.
Note that you are not only doing this to satisfy the funder. When you start addressing all these issues, you are forcing yourself to be in control of all aspects of your business. It will help you to immediately see where your business is lacking, and where you should take action to improve.
Next time, I will discuss the various elements of a business plan, and explain why each of them is important.